Japan is discussing with China possible purchases of Chinese government bonds, Finance Minister Jun Azumi said, a sign the nation is diversifying foreign- exchange holdings by tapping into the worldâ€™s second-largest economy.

â€œI think itâ€™s mutually beneficialâ€ for the two countries to be investing in one anotherâ€™s debt, Azumi said at a press conference in Tokyo today. â€œWeâ€™re not abandoning the dollar or euro, but weâ€™re adding the yuan to deepen our relationship.â€

Prime Minister Yoshihiko Noda signaled in September 2010 as the nationâ€™s finance chief that Japan should have the ability to invest in Chinaâ€™s market given that the Chinese are buying Japanese debt. Japan holds $1.22 trillion of foreign-currency reserves, the worldâ€™s largest after China.

Noda will discuss the bond purchases when he meets his Chinese counterpart later this month, Azumi said, adding that the government has not made a final decision on this issue.

â€œItâ€™s another step forward in the path of yuan internationalization,â€ said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co. (600036), the nationâ€™s sixth-biggest bank. â€œIt shows yuan-denominated assets are becoming more and more attractive. But the quota may be small because China will be cautious in allowing foreign governments to invest in Chinese government bonds.â€

Yuan Investment
Central banks from Thailand to Nigeria plan to start buying yuan as slowing global growth has capped interest rates in the U.S. and Europe. Investment has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($17.6 billion) this year and institutions were granted quotas to invest onshore.

The Nikkei newspaper reported today that Japan was in talks with China to purchase the debt. Japanâ€™s discussions of buying yuan-denominated debt come at a time when investors are seeking alternatives to U.S. Treasuries and European debt. The U.S. lost its AAA rating status at Standard & Poorâ€™s in August.

China, which is also Japanâ€™s largest trading partner, sold the second-biggest net amount of Japanese debt on record as the yen headed for a postwar high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion yen ($11 billion) in October, Japanâ€™s Ministry of Finance said on Dec. 8. China sold a net 2.02 trillion yen of Japanese debt in August 2010, a record based on data going back to January 2005.